Oil drops further below $56 on report of U.S. inventory rise

By Alex Lawler

LONDON (Reuters) - Oil dropped further below $56 a barrel on Wednesday after an industry report pointed to a large rise in crude inventories in the United States, renewing oversupply concerns despite OPEC output curbs.

U.S. crude inventories rose by a more-than-forecast 11.6 million barrels last week, data from industry group the American Petroleum Institute (API) showed on Tuesday, ahead of the government's supply report due later on Wednesday. [API/S]

"The API report is yet another proof that the market is by no means in deficit at the moment," said Eugen Weinberg, analyst at Commerzbank. "It's ample supply."

Brent crude, the international benchmark, was down 54 cents at $55.38 a barrel at 1255 GMT. U.S. crude fell 57 cents to $52.57.

If the API report of an inventory rise is confirmed by the U.S. Energy Information Administration report at 1530 GMT, it would be the ninth straight week of increases. Analysts had forecast a 1.9 million-barrel inventory rise.

"All eyes are on the EIA numbers," said Jeffrey Halley, senior market strategist at Oanda in Singapore. "A big washout of that will see oil test technical support levels."

U.S. crude supplies have continued to rise despite a supply cut that started on Jan. 1 by the Organization of the Petroleum Exporting Countries plus Russia and other non-members. Data has suggested high compliance with the deal.

Total output reductions have exceeded 1.5 million barrels per day (bpd), Saudi Energy Minister Khalid al-Falih said on Tuesday, out of the almost 1.8 million bpd pledged. He also said the results had exceeded low market expectations.

Oil is also facing headwinds from a likely U.S. interest rate rise next week, a strong dollar and rising U.S. oil production, which has been given a boost by the OPEC-led effort to support prices.

The EIA now expects U.S. crude production in 2017 to rise by 330,000 barrels per day to 9.21 million bpd, a bigger rise than previously forecast, according to its monthly outlook on Tuesday. It had previously predicted U.S. output climbing 100,000 bpd compared with 2015.

OPEC is trying to get rid of a supply glut that is keeping oil prices at about half their level of mid-2014. Rising U.S. inventories have raised speculation it may extend the supply cut deal which runs until June.

Officially, OPEC maintains that it is too early to talk of extending the agreement, a position reiterated by the Saudi minister on Tuesday.

(Additional reporting by Keith Wallis; Editing by Edmund Blair)